Managing Excess Sales Tax Collection as an Ecommerce Business
Overcharging sales tax for internet transactions is a real concern that ecommerce businesses must consider because of the many ways you can get it wrong and the costs of doing so. Most recently, this was an issue for Victoria’s Secret as customers in Missouri alleged $2.5 million in actual damages as part of a class action lawsuit for excess sales tax charges. The overcollection supposedly came from the company applying the incorrect sales tax rate for items sold to customers in Missouri.
Ecommerce companies must be vigilant in managing practices to avoid, detect, and mitigate the costs of overcharging sales tax. When these issues do arise, you also need a strategy to address the company’s responsibilities to customers as well as the state’s taxing authority. We cover both topics on excess sales tax collection below.
How Do Excess Sales Tax Charges Happen?
A variety of issues can impact your company’s ability to charge the right amount of sales tax and that wreak havoc on your compliance efforts. In many cases, these issues compound for ecommerce businesses because of inconsistencies in the sales tax rules from state to state that make compliance more difficult to manage and increase the likelihood of charging excess sales tax. For example, you could have:
- Differences in the exempt status of property or services sold.
- Changes in sales tax rates. Check our sales tax guides for state and local rates and other information.
- Variations in how tax applies to discounted goods and promotional sales from state to state.
What Happens When You Overcharge Sales Tax to Customers?
The exact options for addressing sales tax overages depends on the rules of the state with physical or economic nexus over the transaction’s sales tax. Most states will usually give retailers two choices for correcting the overcharge. They can either refund the excess charges to their customers or remit the overages to the state’s revenue or tax department where customers can apply for a sales tax refund. For example, the Washington Department of Revenue encourages consumers to first attempt settlement of excess sales tax payments with the retailer before pursuing a refund with the state.
However, businesses that ignore their excess collection of sales tax and inadvertently keep the difference, could have both criminal and civil exposure. The challenge with managing excess sales tax collections is that you could be liable to two different parties—the customer and the state tax department.
Is It Better to Remit Sales Tax Overages to the State or Refund Customers Directly?
When you discover overcharges of sales tax in your business, finding an effective solution for correcting the issue is essential. Your goal is to evaluate the potential risks and take actions that mitigate the fallout from customer lawsuits, negative press, or interactions from the state department of revenue. The appropriate response will likely depend on the specific circumstances surrounding the excess collection of sales tax. For instance:
- The total amount of excess sales tax collected.
- The number of transactions involved.
- How feasible customer refunds would be (i.e., what was the original method of payment).
- State-specific rules that might apply to the repayment process.
In most cases, the choice will lead to some type of trade-off. For example, a direct refund to customers could limit the risk or damage from a civil lawsuit but could be costly or burdensome to execute. Alternatively, remittance to the state’s tax or revenue department could be a simpler path forward in certain cases but could also put the state on notice and invite a sales tax audit. Remittance to the state also fails to address the risk of civil action or negative press from aggrieved customers because you have not repaid them directly. Our nationwide sales tax challenge professionals can help evaluate the merits of choosing one excess sales tax repayment process over another based on the goals of your company.
Consider These Methods to Avoid Overcharging Sales Tax
While the best method for managing excess sales tax collection is to avoid it altogether, we understand this isn’t always feasible for ecommerce companies. To help your sales tax compliance, you could install controls and checks to help identify and address these types of issues before they snowball into costly mistakes. Consider the following measures as an online retailer:
- Get a sales tax consultation before entering a new market or offering a new product.
- Conduct internal audits to quickly identify overcharges and other noncompliance.
- Take customer complaints about excess sales tax charges seriously.
- Routinely check for changes in applicable sales tax laws and rates that could apply to your goods or services.
Meet with Us about Managing Your Excess Sales Tax Charges Today
When concerns about the collection of excess sales tax arise, our team of professionals are here to guide you and your accounting team through the challenges ahead. We specialize in managing the administrative processes with state revenue departments involving audits, assessments, or refunds of sales and use tax. At all times, our goal is to find the sales tax solution that makes the most business sense for your company and its future.